Traders take many paths to reach their destination.

Can your platform get you there?

Search apps and services to personalize the

NinjaTrader platform to meet your requirements.
Indicators, automated strategies, free tools & more.

Explore now at ninjatraderecosystem.com

Futures, foreign currency and options trading contains substantial risk and is not for every investor. Only
risk capital should be used for trading and only those with sufficient risk capital should consider trading.
 Simply Advanced

Just launched...
XVI
Featuring the NEW Explorer
Discover the latest features at metastock.com/whats-new
 Stocks & Commodities V. 37:02 (8–14): FX Advantages And Alternative Opportunities by Fawad Razaqzada

Copyright © Technical Analysis Inc. www.Traders.com

 Stocks & Commodities V. 37:02 (8–14): FX Advantages And Alternative Opportunities by Fawad Razaqzada
TRADING TECHNIQUES

To Each Its Own

FX Advantages And
Alternative Opportunities
Technical analysis is well suited to forex trading, more
so than other financial markets. Here’s how you can
combine technical setups with intermarket analysis
to help unearth potential trading opportunities.
2016 that trading in FX markets averaged almost $5.10
trillion per day. The main players are large banks,
investment funds, hedge funds, and central banks.
Retail traders and commercial companies can be

T
thrown into the mix as well.
he foreign exchange market (forex or FX) Unlike with equities and commodities, FX market
has its unique characteristics, drivers, and fluctuations are usually very small, with a one cent
advantages (and some disadvantages) over (or 100-pip) daily change for most currency pairs
the stock and commodity markets. I will representing a sizeable move. While this makes FX
highlight a few of its attributes and explain why tech- one of the least-volatile markets, the use of leverage
nical analysis is perhaps better suited to FX than the allows speculators to sharply increase the value of
other financial markets. I will also share some insights the potential movements.
into unique ways of looking for trading opportunities
in FX by combining technical setups with intermarket Fundamental drivers of FX
analysis. But first, I will discuss the main fundamental From my almost 10 years of experience in the mar-
drivers of the FX markets that determine long-term kets, I can confidently state that once you realize
trend direction for currencies. that it is the changes in interest rate expectations that
move currencies, everything else will fall into place.
A quick introduction to forex Interest rate expectations can be impacted by a vast
The forex market is one of the most exciting markets number of factors, including incoming economic
available for retail traders to speculate in. It is a global, data, geopolitical news, and unexpected fiscal policy
over-the-counter (OTC) market for trading curren- announcements. Basically, it’s anything that could
cies, unlike stocks, which are mainly traded over an influence the economic performance of a nation, or
exchange. Currencies are always traded in pairs. So more specifically, anything that could impact infla-
the FX market determines its relative value by set- tion expectations. That’s because most central banks
ting the market price of one currency against another. have a mandate to keep price levels low and stable,
Continuously in operation 24 hours a day, except at using the only tools they have: interest rates and
the weekends, trading with most forex brokers usually supply of money.
starts at 22:00 GMT on Sunday (or early Monday in While these fundamental developments usually
Asia) until 22:00 GMT Friday. It is by far the largest take from several months to several years to work
market in terms of trading volume, making it extremely through the economy, the markets usually react as if
ROY WIEMANN

liquid and potentially less prone to manipulation. The the change is happening right now. This is because of
Bank For International Settlements estimated in April an economic assumption that market participants are

by Fawad Razaqzada

Copyright © Technical Analysis Inc. www.Traders.com

 Stocks & Commodities V. 37:02 (8–14): FX Advantages And Alternative Opportunities by Fawad Razaqzada
The forex market is one of
the most exciting markets
available for retail traders to
speculate in.
rational investors and they discount the odds of future interest
rate changes as and when new information is made public. Of
course, market participants are not all rational investors—far
from it—and that’s why trading actually exists and why technical
analysis works. Nonetheless, it is the economic fundamentals
that move the markets in a particular direction over the long
term, regardless of any temporary change in sentiment or some
short-term technical development.
Large institutional investors such as insurance and pension
funds are always on the lookout for opportunities to invest their
money in assets that pay the best yield at acceptable levels of
risk. Their interest is in making a return on their capital. This
so-called “smart money” tends to make its way to countries
where government bond yields are at comparatively higher levels.
Bond yields tend to be higher in economies that are growing,
or expected to grow, at a faster clip. In part, this reflects inves-
tors’ belief that the faster-growing economy would be pushing
up inflation, and therefore requiring monetary conditions to be
tighter if the central bank of that nation’s mandate is to keep the
annual change in the level of prices at a low and stable level,
usually around 2%.
To illustrate this point, I have taken the yield differential
between the German and US 10-year bonds and plotted this
spread against the EUR/USD exchange rate. (I will come back
to this in the section “Intermarket analysis: An alternative”
later on in this article.)
One of the monetary policy tools central banks have at their
disposal is the ability to change nominal interest rates. When
the central bank decides to increase rates, this effectively helps
to reduce borrowing from—and therefore spending on credit
by—businesses and individuals. To give you a basic example of
how this might impact the real economy, think about mortgages
or home loan finances: Higher interest rates push up the debt
costs for the holder. As a result, the level of disposable income
from households falls, which squeezes their spending power.
This in turn lowers company revenues and profits, potentially
slowing down wage growth. And the cycle continues.
Another method central banks use to withdraw liquidity is
to reduce their government debt holdings. Bond prices and
bond yields have an inverse relationship. When central banks
offload large amounts of government bonds in the market, it
pushes up bond yields.
The higher bond yields and interest rates mean smart money
will be attracted toward that particular economy. This raises
demand for its currency as foreign funds must be converted
to the domestic currency before they can be invested in the
Copyright © Technical Analysis Inc. www.Traders.com
country’s bond, stock, or housing markets. From basic eco-
nomic theory, we know that when demand for anything rises,
while everything else is held constant, price has to rise. So, in
this case, it is the exchange rate that rises when demand for
the currency rises.
From the above explanation, it is clear that anything that
is deemed to be inflationary would be boosting expectations
for tighter monetary conditions and that in turn would lead to
inflow of foreign funds into the economy. For example, when
the economy creates more jobs than expected or when retail
sales unexpectedly jump, in theory this will lead to a rise in
aggregate demand and, over time, inflation.
As mentioned earlier, the processes I just described will
obviously take several months and in some cases years to
work through the economy, but in the eyes of speculators, the
impact will be instantaneous on the currency markets. This is
because of an economic assumption that investors are rational
and efficient in discounting future cash flows. As technical
analysts, we know that this is not exactly true, otherwise, trading
wouldn’t exist. Nonetheless, the process does take place over
a number of months and sometimes years, as more and more
people adjust to changing economic conditions, and that’s why
we have trends in the markets.
That, in a nutshell, is one of the simplest ways I can explain
why currencies tend to rise and fall. Now that we know what
moves the FX markets, let’s turn our focus to trading.
FX trading vs. stocks and
commodity futures
The first point I would like to make
here is that much like trading stocks
and commodity futures, you don’t need
to know much about the fundamentals
if you have a good technical strategy that has a proven track
record. Nonetheless, it is important to at least be aware of the
fundamentals and know, for example, when a major central bank
announcement is due. It is of course advantageous to be in sync
with the fundamentals when making trading decisions based on
technical levels, as this would most likely improve results.
FX trading is similar to trading stocks or futures, except
you are buying or selling one country’s currency against an-
other’s. Instead of shares or futures, you are buying or selling
a number of currency units called lots. The standard size for a
lot is 100,000 units of currency, but mini (10,000 units), micro
(1,000), and even nano (100) are also available for those with
smaller account sizes. A one-pip (or 100th of a cent) movement
for a standard lot corresponds with a $10.00 change; for a mini
it is $1.00, micro $0.10, and nano $0.01.
With smaller lot sizes, traders can perhaps manage their
positions better, just as they can with inexpensive stock shares.
For example, smaller lot sizes may allow the FX trader to take
partial profits along the way, while keeping some in the market
in order to ride the trend, if one emerges. With expensive stock
shares, this isn’t an option for traders with small account sizes,
and in most cases the higher margin requirements might be an
additional factor preventing use of proper position management.
 Stocks & Commodities V. 37:02 (8–14): FX Advantages And Alternative Opportunities by Fawad Razaqzada

Moreover, since stocks have shorter trading hours than FX and
more risk of the stock gapping, a stock trader may decide against
holding (part of) their positions open to ride the trend.
FX trading opens up a vast number of markets, significantly
increasing trading opportunities on a day-to-day basis. As
well as the major pairs such as the EUR/USD and USD/CAD,
speculators can trade exotic pairs such as the SGD/JPY. While
stock market traders have the same advantage, equity markets
tend to have a stronger positive correlation with one another,
meaning that on any given day, a highly liquid stock such as
Facebook (FB) or Morgan Stanley (MS) might go up and down
with the wider stock markets, depending on sentiment on the
day. In FX, while movements in some currencies will obviously
be correlated, this isn’t the case for all pairs. For example, the
volatility in USD/JPY will have no obvious impact on the EUR/
GBP or AUD/NZD.
So traders who have an eye for only spotting long opportu-
nities may have a tough time finding opportunities when the
stock market is in a correction phase. But the same trader, using
the same technical tools at his disposal, can use his skills and
knowledge to look for long opportunities in an FX market that
is trending higher. Likewise, a trader whose specialty is trading
the ranges may have a hard time when the stock markets are
rallying or falling sharply. But in FX, you are bound to find a
pair or cross that is range-bound even during periods of high
volatility for most major pairs.
Another advantage of trading currencies over stocks is that
traders can speculate on macro drivers of the economy such
as data and geopolitical events. While macro events can also
impact certain stocks and sectors the same way, the reaction
may not always be straightforward, as stock investors also need
to take company- or sector-specific news into consideration.
With FX, therefore, you don’t have to worry about micro and
company-specific news, arguably making it a less risky asset
class to trade.
What’s more, FX markets trade 24 hours, 5.5 days a week as
opposed to only being open during exchange hours. This means
more trading opportunities and it reduces the prospects of seeing
large gaps, which are typical of stocks when some fundamental
stimulus (either company-specific news like earnings or a macro
event) causes a large void at the next day’s open.
Because of its reduced risk profile, the margin requirements
for FX tend to be lower over stocks and some other asset classes,
meaning speculators can control more with less capital.
Trading stocks has its own advantages over FX. Among other
things, typical retail investors can’t see spot FX trade volume
as they can when trading stocks and futures. Volume with price
action can arguably provide more information about the market’s
next move, compared with price alone. Also, there won’t be any
ambiguity over the price of a stock since stocks are traded on
exchanges. FX prices can be slightly different from broker to
broker, or significantly different on Brexit-like events.
How technically
friendly is FX?
The slightly more opaqueness of FX over
stocks (due to invisibility of volume for
most retail investors) and that they are
traded 24 hours arguably makes FX a
more technical-friendly asset class compared to stocks. You
could argue here that by utilizing the volume profile, trading
stocks can provide more confirmation and therefore lead to
better, more informed, decisions. While that may be the case,
the counterargument by spot FX traders is that with no knowl-
edge of volume, traders are more likely to treat key support &
resistance levels with the same level of respect and therefore

Higher high

German-US 10 year
bond yield spread
Sell
Higher high
Lower
high
Sell

EUR/USD Daily Chart Lower high

FIGURE 1: GOVERNMENT BOND YIELDS. These are one of the fundamental drivers of forex. The yield spread between the 10-year German and US bonds has had a strong
positive correlation with the EUR/USD exchange rate. One of the many ways speculators could use this type of correlation is by looking for signs of divergence.

Copyright © Technical Analysis Inc. www.Traders.com

 Stocks & Commodities V. 37:02 (8–14): FX Advantages And Alternative Opportunities by Fawad Razaqzada
more likely to act around such levels (by buying and selling).
Their actions around such levels usually provide short-term
tradable bounces, which could provide a profit even if price
eventually breaks through that level. Also, that they are traded
24 hours a day reduces the risks of price gapping through such
key technical levels.
Intermarket analysis: An alternative
Intermarket analysis is a form of technical analysis that observes
the relationship between various asset classes such as stocks,
bonds, commodities, and currencies. This form of analysis can
be especially useful to FX over other types of asset classes.
The most obvious example is in the utilization of government
bond yields, which tend to be among the biggest fundamental
drivers of FX, as explained earlier. When country A’s yields rise
at a faster pace than B’s due, for example, to better economic
performance, the exchange rate tends to rise in favor of A. To
illustrate this point, refer to the chart in Figure 1, which shows
the yield spread between 10-year German and US bonds. As
can be seen, this spread has had a strong positive correlation
with the EUR/USD exchange rate. One of the many ways that
speculators could use this type of correlation is by looking for
signs of divergence.
In this example, the EUR/USD made a higher high in early
2018 relative to its old high around September 2017. But at the
same time, the German–US yield spread had made a lower
high. This was a clear sign that the EUR/USD had risen above
its fundamental value based on interest rate differentials. This
should have put speculators on the lookout for bearish techni-
cal setups on the EUR/USD. One clear sell signal subsequently
emerged when the EUR/USD broke below the support of its
triangle pattern in April 2018 around the 1.2200 handle. An-
other similar setup with the yields spread showing a negative
Lower high Higher high
WTI Crude oil
CAD/JPY
Daily Chart
FIGURE 2: RELATIONSHIP BETWEEN WTI AND CAD/JPY. Crude prices made a lower high while the CAD/JPY made a higher high and thus formed a negative divergence.
Oil prices went on to fall sharply, well before the CAD started to move.
Copyright © Technical Analysis Inc. www.Traders.com
FX trading opens up a
vast number of markets,
significantly increasing
trading opportunities on a
day-to-day basis.
difference was made in September 2018. This time, the break
of the trendline on the EUR/USD could have been a very good
sell setup.
In addition, you have the likes of the Canadian dollar and
Norwegian krone, which tend to correlate positively with oil
prices given that crude makes up a large portion of these nations’
exports. What’s more, changes in prices of iron ore or copper
tend to move the Australian dollar, while the New Zealand
dollar tends to move along with unexpected changes in dairy
prices. To illustrate this, take a look at Figure 2, showing the
relationship between WTI oil and the CAD/JPY. Like the EUR/
USD example, crude prices made a lower high while the CAD/
JPY made a higher high and thus formed a negative divergence.
Oil prices went on to fall sharply well before the CAD started
to move. One straightforward entry on the CAD/JPY would
have been to sell the rounded retest of the broken support level
around the 103.60 area in January 2015. Another obvious entry
would have been in June that year, when the CAD/JPY broke
the short-term bullish trendline.
Furthermore, there are so-called “safe-haven” currencies
such as the Japanese yen and Swiss franc that come into focus
Sell
Sell
 Stocks & Commodities V. 37:02 (8–14): FX Advantages And Alternative Opportunities by Fawad Razaqzada

USD/JPY
Daily Chart

Higher
low

Double
bottom Buy
S&P 500
Lower low
Buy
Buy
Buy
Lower low

FIGURE 3: SAFE-HAVEN CURRENCIES VS. INDEXES. The USD/JPY and S&P 500 generally go up and down in unison. Speculators could have bought the dips back into
support on the USD/JPY, based on the bullish behavior of the stock markets.

particularly during stock market rallies and turmoil. In Figure

3, this relationship is highlighted by the USD/JPY and S&P 500,
both generally going up and down in unison. In this example, Once you realize that it is
the S&P 500 made a double-bottom low in April while the
USD/JPY made a lower low. A month later, the S&P formed a the changes in interest rate
higher low and once again, the USD/JPY formed a lower low. expectations that move
Both cases were examples of positive divergence. Speculators currencies, everything else
could have bought the dips back into support on the USD/JPY, will fall into place.
based on the bullish behavior of the stock markets, such as the
areas highlighted on the chart.

It’s a unique market

The FX markets are like no other. On a
day-to-day basis, there can be a signifi-
cant number of tradable opportunities,
whether based on technicals or funda-
mentals. The trading week is longer
than in the stock market and almost all other markets (with
the exception of cryptocurrencies, which are open 24 hours a
day, seven days a week). The FX market has many advantages
over stocks for a typical retail trader, although it has some
disadvantages too.
indexes, Razaqzada has expertise in reading price action on
the charts. He uses his knowledge of economics together with
fundamental analysis to forecast short-term price fluctuations.
He has also been trading his personal account for many years.
You can follow him on Twitter at @Trader_F_R.
Further reading
Triennial Central Bank survey of foreign exchange and OTC
derivatives markets in 2016. Retrieved on Nov. 6, 2018 from
https://www.bis.org/publ/rpfx16.htm.

Fawad Razaqzada is an economist and market analyst who has

been involved in the financial markets for almost 10 years. He
has worked for several leading brokerages as a market ana-
lyst in London. Specializing in forex, commodities, and stock

Copyright © Technical Analysis Inc. www.Traders.com

 How much is your
broker charging you?

US Margin Loan Commission Rates

Rates Comparison Comparison
Equity Options1 Base
$300K Trades per contract
no base cost
Interactive Brokers2 3.36%3 $2.23
$0.67 per contract4
$6.95 base
E-Trade 8.75% $6.95
+ $0.75 per contract
$4.95 base
Fidelity 7.82% $4.95
+ $0.65 per contract
$4.95 base
Schwab 7.82% $4.95
+ $0.65 per contract
$6.95 base
TD Ameritrade 8.50% $6.95
+ $0.75 per contract
Each firm’s information reflects the standard online trades pricing obtained from the respective firm’s
websites as of 12/5/18. Pricing and offers subject to change without notice.

To see the full comparison visit:

ibkr.com/iwantmore

Interactive Brokers Rated #1

Best Online Broker 2018 by Barron’s*

Trading on margin is only for sophisticated investors with

high risk tolerance. You may lose more than your initial investment.
Member - NYSE, FINRA, SIPC – Supporting documentation for any claims and statistical information will be provided upon request. Services vary by firm. *Interactive
Brokers rated #1, Best Online Broker according to Barron’s Online Broker Survey 2018: All Together Now, March 26, 2018. For more information see, ibkr.com/info -
Barron’s is a registered trademark of Dow Jones & Co. Inc. [1] Options involve risk and are not suitable for all investors. For more information read the “Characteristics
and Risks of Standardized Options”. For a copy, call 312 542-6901. [2] The IB commission rates shown are the average of the client commissions for trades executed in
November 2018 and are subject to minimums and maximums as shown on the IB website. Some of the firms listed may have additional fees and some firms may reduce
or waive commissions or fees, depending on account activity or total account value. Under some commission plans, overnight carrying fees may apply. [3] IB calculates
the interest charged on margin loans using the applicable rates for each interest rate tier listed on its website. For additional information on margin loan rates, see ibkr.
com/interest. [4] $1.00 commission minimum.
02-IB19-1167CH1165
Daily technical commentary
by expert analysts to help you
make smarter investing decisions
From daily blogs to live web shows, StockCharts.com hosts free
current market analysis and educational commentary from some
of the industry’s most distinguished technical analysts.

Free daily blogs featuring over a

John Murphy Martin Pring
dozen renowned technical commentators
StockCharts.com hosts free daily blog content from over a
dozen professional technical analysts, including prominent
names such as John Murphy, Martin Pring and Arthur Hill.
Thousands of online investors trust StockCharts.com
Arthur Hill Tom Bowley to provide the unbiased expert analysis and enriching
educational commentary they need to cut through the
noise and make smarter investment decisions.

Greg Schnell Chip Anderson

Live web shows hosted by
seasoned market technicians
Our free web shows are hosted by some of the financial
industry’s most distinguished chartists. Join these technical
titans LIVE as they put their years of experience on display
Carl Swenlin Erin Swenlin
and share invaluable insights into the tools and strategies
they use in their own trading. Visit StockCharts.com/webinars
to learn more and watch our next show.

Gatis Roze Julius de Kempenaer

and more!

StockCharts.com
© StockCharts.com,Inc. All Rights Reserved. Information provided by StockCharts.com is not investment advice. You are responsible for your own investment decisions.
subscribe or renew today!
Every Stocks & Commodities subscription
(regular and digital) includes:
• Full access to our Digital Edition
The complete magazine as a PDF you can download.
• Full access to our Digital Archives 8999
1 year.................
$
That’s 35 years’ worth of content!

2 years............ 149
• Complete access to WorkingMoney.com $ 99
The information you need to invest smartly and successfully.

3 years............ 199
• Access to Traders.com Advantage $ 99
Insights, tips and techniques that can help you trade smarter.

PROFESSIONAL TRADERS’ STARTER KIT

A 5-year subscription to S&C magazine that includes
everything above PLUS a free* book, Charting The Stock
Market: The Wyckoff Method, all for a price that saves
you $150 off the year-by-year price! *Shipping & han-
dling charges apply for foreign orders.

5 years..........
$
29999
That’s around $5 a month!

Visit www.Traders.com to find out more!

Email: Circ@Traders.com • Phone: 206-938-0570 facebook.com/STOCKSandCOMMODITIES @STOCKSandCOMM